Bamboozled December 14, 2018: Why some couples are spending the holidays in divorce court: Alimony rules are changing

There’s a bit of a panic among couples who are in the middle of a divorce.

Hurry. Speed matters. Let’s get this done fast.

Why the rush?

Couples are trying to beat the clock because starting in 2019, the new tax plan makes a significant change to how alimony payments are treated.

For divorces finalized by the end of 2018, alimony payments are deductible for the payor and taxable to the payee. But starting in 2019, alimony will be tax neutral.

“This could have a monumental negative effect on the economic circumstances of the payor,” said Tom Snyder, a family law attorney with Einhorn Harris in Denville.

All divorces before 2019 will be grandfathered under the old deductibility rules.

Does it really matter?

Wanting to keep the deductibility of alimony on the table, some couples are pressuring their divorce attorneys to move faster and get it done by New Year’s Eve.

Lynne Strober, an attorney with Mandelbaum Salsburg in Roseland, said she’s seen a “very significant rush” to complete cases.

“I have actually been retained recently to work on substantial cases to be resolved before the end of the year,” she said. “I am working seven days a week to address this.”

She said attorneys, accountants and their staffs are working diligently to accommodate clients who are concerned with the change in the tax code.

Terryann Bradley, a family law attorney with Laufer, Dalena, Cadicina and Bradley in Morristown, agrees that everyone is working in overdrive.

“I am honestly working at a maximum capacity like I have not in many years,” she said. “The singular reason is our clients’ desire, and understandably so, to have their judgments of divorce executed in 2018.”

But a lot of the panic is misplaced, said Kenneth White, a certified matrimonial attorney with Shane and White in Edison.

He said that’s because there will be a change in the way alimony will be negotiated in 2019.

“I have had several clients who acted as if the world would come to an end if their divorce was not finalized before the end of the year, primarily a fear of the unknown,” White said.

He said those fears may be unfounded.

Attorneys will “account for the fact that alimony is no longer a taxable event, with the goal to set alimony going forward so that it has the same ‘net’ effect on each party’s income as a non-taxable event as it would have had when it had been a taxable event,” White said.

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There’s some question among the experts about how it will all work out.

Bradley said there are two schools of thought.

“One is that as long as parties have a fully executed Marital Settlement Agreement, the taxability of alimony will carry forward,” she said. “The second school of thought, the more conservative school of thought, is that you need a final Judgment of Divorce with an incorporated Agreement dated 2018 for alimony to be taxable into the future.”

Bradley said she tends to lean towards the conservative view, so she’s all in on finalizing cases in 2018.

“People are frightened about what will unfold next year,” she said.

Divorcing parties will have to wait on a new “rule of thumb” to manage their expectations for alimony.

Although the unknown is a scary proposition, Bradley said, attorneys and divorcing couples will come to fair agreements.

A federal tax windfall

While a divorce settlement is meant to keep things equitable and make sure each party can maintain their lifestyle as much as possible, the deduction change will, in many cases, give more to the federal government.

That’s because it’s common for the alimony payor to be the breadwinner, or the higher income earner, and therefore the payor would be in a higher tax bracket.

Now that alimony can’t be deducted by the payor, more taxes will be paid on those funds compared to how it works for 2018 divorces.

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Take these examples provided by Jody D’Agostini, a certified financial planner with AXA Advisors/The Falcon Financial Group in Morristown.

Say someone earns $500,000 a year and pays alimony of $150,000 a year. In 2018, the payor would owe $93,990 in taxes – assume for a moment no additional deductions – and the alimony recipient would owe $27,410 because the alimony would be taxed. But if the divorce isn’t finalized until 2019, the payor would now owe $146,490 in taxes and the recipient would owe nothing.

That means the feds would get $25,090 more in tax dollars under the new 2019 rules.

A person who earns $300,000 a year and pays $100,000 in alimony, in 2018, would owe $41,851 in taxes while the recipient would pay $15,404. In 2019, the payor would have a tax bill of $76,490 and the recipient would owe nothing.

The feds would get $19,235 more than if the divorce was finalized in 2018.

Finally, take the case of someone who earns $100,000 and pays $33,000 in alimony. In 2018, the payor would owe $8,045 and the recipient would pay $2,333. Compare that to 2019, when the payor would owe $15,416 and the recipient would owe nothing in taxes.

Once again, the feds would get more. Under 2019 rules, it would get $5,038 more than under the 2018 rules.

Are the courts backed up?

With the rush, one might expect there to be a back-up in the courts, but the attorneys we spoke to said they haven’t seen it.

White said each county in the state handles its own calendar and moves cases through the docket independently.

“In Middlesex County, a settled case can be resolved and finalized by way of an uncontested hearing within days – if not on the day – the judge is notified that a settlement has been secured,” he said. “In some other counties, Mercer, Morris, it can take months to secure an uncontested hearing date.”

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Strober said she hasn’t seen a back-up either, “but we haven’t gotten down to crunch time, meaning the very end of the calendar year.”

She said she’s been told some judges will be working during the last week in December in an effort to put cases through.

Divorcing couples and their attorneys have known about the coming change, and so have the courts.

Snyder said he’s seen courts planning to accommodate the anticipated last-minute rush by litigants.

“In Morris County, the court has arranged to make judicial resources available during the court’s official December recess in an effort to provide litigants every opportunity to finalize their divorce before years’ end,” Snyder said

How long should a divorce take, anyway?

There’s no hard and fast rule for how long it should take to finalize a divorce.

White said there’s a general guideline from the state that all divorces should be finalized within one year of the filing of the Complaint for Divorce. But, he said, this is inconsistent from county to county.

“That one year deadline is taken extremely seriously in Middlesex County, sometimes to a fault,” White said. “In other counties, generally because they are understaffed, a contested divorce can take between two and four years from start to finish.”

Even if a divorce is no-fault, the timing isn’t necessarily faster.

“It depends on whether the case can get settled or not and how complicated the discovery is and how cooperative the parties are,” Strober said. “I have a case now that’s almost five years old and we also have cases that resolve fairly quickly.”

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Resolving custody, time-sharing and financial issues can drag out a case, she said.

Snyder said each case is unique and its timeline is impacted by its own particular facts and circumstances.

As a general matter, he said, litigants to a divorce proceeding who agreed to the terms arising out of their divorce can move through the system quite quickly.

“In comparison, in cases where the parties cannot come to an agreement as to terms, the goal of the system is to attempt to resolve such disputed cases within a year of the filing of the Complaint for Divorce,” he said. “The complexity of the case and, the effectiveness of each county and court in managing its calendar, all impact the ultimate time it takes to obtain resolution of a disputed divorce case.”

So can the rush work?

While technically a full divorce, with extreme cooperation, can be finalized within a day, it is unlikely that any new case will be scheduled between now and the end of the year, White said.

He said an example of extreme cooperation would be a couple that resolves all issues relevant to their divorce and memorializes their settlement in a formal Marital Settlement Agreement.

They jointly go to the court, with their attorneys, and one party files a Complaint for Divorce.

Moments later the other party files an Answer or Appearance to the complaint, and the parties jointly notify the court clerk that they have a settled case and would like to appear before the judge to secure a Judgment of Divorce.

For this to work, calls would need to be made in advance of appearing in court to assure the court’s cooperation, White said.

But unless a matter is already scheduled, it will be hard to get a new case done before New Year’s, White said.

There’s simply not enough time, he said.

“The courts are closed between Christmas and New Year’s except for emergent matters. Further, many judges take vacation the week before Christmas,” he said. “Therefore, there is basically only one week left to get in front of the judge assigned to a person’s case, and that judge’s calendar is likely already booked with commitments.”

The year-end rush

A rush at the end of the year isn’t new.

Historically, Snyder said, each party’s ability to file separate federal and state income tax returns for the applicable tax year is based upon marital status on the last day of the year. So, he said, if the parties want to file separate federal and state income tax returns for the tax year 2018, this is another incentive to finalize a divorce and ensure a judgment of divorce is entered prior to the end of the year.

Setting aside the tax implications of the finalizing of a divorce before the end of the year, couples shouldn’t overlook the emotional benefits of completing a divorce prior to Dec. 31, Snyder said.

“Moving into a new phase of one’s life at the onset of the new year and looking forward to the next year with the opportunities and benefits of a new beginning is always a well-recognized intangible of completing a divorce prior to Dec. 31,” he said.